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Chapter 1

Introduction – What Is Forex?

Foreign exchange is the simultaneous buying of one currency and selling another. Currencies are traded through brokers and dealer and are executed in currency pairs; for an example, Euro dollar and U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).

Foreign exchange is the largest financial market in the world; volume more than $5 trillion daily. This volume is three times the total amount of the stocks and futures markets combined.

Unlike other financial markets, Forex spot has neither physical location nor central exchange. It operates through an electronic network of banks, corporations, and individual trading one currency for another. Lack of physical exchange gives the Forex market the opportunity to operate 24-hours bases, spanning from one zone to another across major financial center. The fact — no centralized exchange — is important to know in all aspects of the Forex experience.

Forex is unique because of its following features:

– Trading Volumes
– Extreme liquidity
– Number and variety of traders
– Geographical dispersion
– 24-hours trading except weekends.
– Variety of factors that affect the exchange rates
– Use of leverage
– Free demo platforms
– Free trading account

Which Currencies Are Traded?

Any currency back by an existing nation are traded at the larger brokers. The trading volume of the major currencies is given in descending order: please see the below media.

Major Forex pairs and their nicknames:

USD – US Dollar
EUR – Euro
JPY – Japanese Yen
GBP – British Pound
CHF – Swiss Franc
CAD – Canadian Dollar
AUD – Australian Dollar
NZD – New Zealand Dollar

EUR/USD – “Euro”
USD/JPY – “Dollar Yen”
GBP/USD – “Cable” or “Sterling”
USD/CHF – “Swissy”
USD/CAD – “Dollar Canada” (CAD referred to “Lonnie”)
AUD/USD – “Aussie Dollar”
NZD/USD – “Kiwi”
Forex currency symbols always have three letters, the first two letters represent the name of the country and the third letters identifies the name of that country’s currency. (the “CH” in the Swiss Franc stands for Confederation Helvetica).

Forex transaction is transacted between two currencies. The price of a pair is the ratio between their value, pairs, crosses, majors, and exotics are terms refer to combination of currencies.

Who Trades Foreign Exchange Market?

There are two groups that trade currencies. Minor percentage of daily trading is from companies and Governments who buy or sell products and in a foreign country who convert profits made in foreign currencies into their own domestic currency in the course of doing business, this is also refer to hedging activity. Speculators range from large banks trading currency or home-based operator trading. Retail Forex has grown in the past for 10 years, still represent small percentage of the total daily trading volume and the numbers is growing rapidly.

Today, importers, exporters, International portfolio managers, multinational corporation, high-frequency traders, speculators, day traders, long-term holders, and hedge funds all involve in Forex market to pay for goods and services to transact in financial assets and to reduce risk of currency movements by hedging their exposure in other markets.

Speculator make profit through buying one currency and selling another. The hedger trades to protect his or her margin on International transaction for an example, unfavourable currency fluctuation. Hedger has essential nature in interest on one side of the market or the other; speculators do not. Speculators add liquidity to market making easier for everyone to transact business with prices. They also transform the risks that exist in the marketplace. Regarding the speculator and gambler who create risks in order to take them.

How Are Currency Prices Determined?

Currency prices are naturally affected by constantly changing economic and political conditions but the most important is the interest rates, economic conditions, International trade, economic inflation or deflation, and political stability. Sometimes Government participate in the foreign exchange market to influence the value of the currencies by flooding the market with domestic currency in an attempt to lower the price or conversely buying to raise the price. This continuous process is also known as central bank intervention. And all these key factors and large market orders can cause high volatility in currency prices. The report of sudden changes in unemployment can drive currency price sharply higher or lower for a brief period of time – that’s why many news traders attempt to capitalize on such surprises. Technical factors such as chart pattern may naturally influence currency prices. However, the size of the trading volume in Forex market is impossible for any entity to manage the market for any length of time. Modern psychology and reasonable expectation also figure in the economic equation to uniquely determine the price relative currency to another official currency. Undoubtedly, all these factors of correlation represent no progress in nature. It naturally means they are constantly changing and rearranging themselves, sometimes in nonpredictive ways. If we properly focus on one or few but others might change unnoticed. The concept theory comes to mind.

Why Trade Foreign Currencies?

Presently, the dollar constantly fluctuates against other currencies of the world. There are several factors cause this fluctuation such as the decline of global equity markets and declining world interest rates that has forced investors to find new opportunities. Global increase in trade and foreign investments led many national economies become interconnected with one another. This interconnection, and the result fluctuation in exchange rates has created huge International market – Forex. For many investors this has created exciting opportunities and offer unmatched potential for profitable trading in any market condition of the business cycle. These factors represent to the following advantages:

⦁ No commissions. No clearing fees, no exchange fees, no Government fees, no brokerage fees if you trade with a market maker.

⦁ No middlemen. Spot currency trading does away with the middlemen and allows clients to interact directly with the market maker who responsible for the pricing on a particular currency pair if you trade with an Electronic Communication Network (ECN).

⦁ No fixed lot size. In futures markets, lot or contract sizes are determined by the exchanges.

⦁ Low transaction cost. The retail transaction cost – the bid/ask spread is typically less than 0.1 percent under normal market conditions. At Larger dealers – the spread is as low as 0.07 percent. Prices are quoted in pips for currencies. Today pip spreads can be zero at some periods for the most actively traded pairs but typically range from two to five pips.

⦁ High liquidity. With an average trading volume of more than $5 trillion per day, Forex is the most liquid in the world. It means a trader can enter or exit the market at any market condition.

⦁ Negative margin, high leverage. These factors increase the potential for higher profits and losses. Traders gain the access to leverage up to 400 percent although 50 percent to 100 percent is ordinary. 400:1 means $1 controls $400 of currency.

⦁ 24-hour market. A trader can take advantage of the market condition at any time. There is no waiting for the initial bell. The market is closed from Friday afternoon to Sunday afternoon. As the market transition at the Asian session – usually entirely from 5 P.M. to 7 P.M. Eastern Standard Time.

⦁ Not related to the stock market. Trading in the Forex market involves selling and buying one currency against another. There is no correlation between the foreign currency market and stock market although both represent measures of economic activity in some way but may have correlated in specific respects for a limited time. A bull market is when traders buying the currency against other currencies. Conversely, if the outlook is pessimistic, we maintain a bear market when traders generate profits by selling the currency against other currency. The U.S. Dollar (USD) can be in deep trouble, but so can the European Euro (EUR). The game represents the ratio between the two. The top four traded currencies are the U.S. Dollar (USD), the Euro Dollar (EUR), the Japanese Yen (JPY), and the British Pound (GBP).

⦁ Interbank market. The backbone of the Forex market consists of global network dealers. They are the leading major commercial banks that communicate and trade with one another and their clients through electronic networks and by telephone. The Forex market is referred to as over-the-counter (OTC).

⦁ No one can corner the market. The forex market consists of so many participants that no distinct entity, not even a central bank, control the market price. Even central banks inclined to intervene to manipulate market prices.

⦁ No insider trading. Because the Forex market size and decentralized, there is no chance of insider trading. Fraud possibilities are significantly rarely than other financial instruments.

⦁ Limited regulation. Limited Government influence in Forex market because there is no centralized location or exchange. Most countries is regulatory and fraud is found and subject criminal penalties in all countries. Regulatory bodies such as the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) are presently beginning to handle limited control of the retail Forex business.

⦁ Online trading. Currently, we can select from more than 100 online Forex broker-dealers. Although none is suitable, a trader has extensive choices of an option at his or her disposal.

⦁ Third-party product and services. The immense popularity of retail Forex has fostered a burgeoning industry of third-party products and services.

What Tools to trade Currencies?

A computer with reliable high-speed Internet connection and free demo account offer by retail Forex brokers.

What Does It Cost To Trade Currencies?

Online currency trading account cost as little as $1! Mini accounts begin at $400. Micro and mini account the good way to begin trading. Unlike futures, where apparent size of a contract is set by exchanges, in Forex you can carefully select how much currency you  wish to buy or sell. As shown, $3,000 is not unreasonable if the trader engages in appropriately sized trades.

Market maker brokers bear their expenses and profit by marking up the bid-ask spread. ECN brokers properly charge a flat lot fee to trade. For an example, if buys and then later sell 100,000 EUR/USD and the spread comprise two pips, pay the total 4 pips or approximately $400. ECN fees vary tremendously from $15 to $40 for 100,000 lots. If trade larger lot size and or frequently able to negotiate these costs.

Forex Versus Stocks

Historically, securities markets are considered by the majority of the public, as an investment. In the past 10 years have captured more speculative nature. This because the downfall of the stock market and much security receive fundamental question that is in dispute and must be settled extreme volatility of the irrational exuberance displayed in the marketplace. The necessary consequence return associated with a capital investment was no longer true. The return was potentially higher than long-term investing and was not exponential, to say the least.

After the onset rush many traders moved into futures stock index markets. They experience more significant leverage for their capital. And not to tied up their capital and could gain interest somewhere else. Like futures markets, spot currency trading represent an excellent investment for day trader that desire to leverage his or her current capital to trade. Spot currency trading gives more options and greater volatility while at the same time more distinct trends than currently available in stock futures indexes.

There are precisely 4,000 stocks listed on the New York Stock Exchange. Another 2,800 are listed on the NASDAQ. Trading only the seven major USD currency pairs instead of 6,800 stocks is much simplifying matters for the Forex trader. The trader can specialize one or two currency pairs and accept a full offering all the opportunity he or she can seize.

Forex Versus Futures
A futures contract is a legal binding agreement to buy or sell something at a predetermined price at a specified time in the future. The asset transacted is usually a commodity or financial instrument. However, in Forex is a spot (cash) market, trades rarely exceed two days. Forex brokers allow their investors to rollover open trades for two days. There are Forex futures or forward contracts, but rollovers facilitate all the activity in the spot market.

Advantages in Forex trades are executed at the time and price asked by the speculator. There are numerous stories about futures traders being locked into an open position even after placing the liquidation order. High liquidity of the foreign exchange market ensures prompt execution of orders (entry, exit, limit, etc) at the desired price and time.

The Commodity Futures Trading Commission (CFTC) authorizes futures exchanges to place daily limits on contracts that significantly hamper the ability to enter and exit the market at selected price and time. And there are no such limitations exist in Forex.

Stock and futures traders used to think concerning the U.S. dollar versus something else, such as the price of a stock or the price of wheat. Like comparing apples to oranges. In currency trading is always in comparison of one currency to another currency.

There is always some risk in speculation regardless of which financial instruments are traded and where they are traded, regulated or unregulated. Leverage is a door that swings both ways.

Summary

Forex means foreign exchange. The Forex or FX market is traded more than $5 trillion a day, dwarfing everything else, including stocks and futures. Because there is no centralized exchange for currency trading.
There is a reason to consider Forex trading, including high leverage and low costs. Access to the Forex markets via Internet has resulted in a great deal of interest by small traders. Getting started requires lesson, a computer and Internet connection.

“It is better to fail in originality than to succeed in imitation.” – Herman Melville

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